Bancorp Inc
NASDAQ:TBBK
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Bancorp Inc
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00:04 Ladies and gentlemen, thank you for standing by, and welcome to the Q3 twenty twenty one The Bancorp, Inc. Earnings Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions].
00:35 I would now like to hand the conference over to your speaker today Andres Viroslav. Thank you. Please go ahead, sir.
00:41 Thank you, Lisa. Good morning, and thank you for joining us today for the Bancorp’s third quarter twenty twenty one financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Paul Frenkiel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.come. There will be a replay of the call beginning approximately twelve PM Eastern time today. The dial-in for the replay is 855-859-2056 with a confirmation code of 9257937.
01:11 Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of nineteen ninety five. Such statements are subject to risks and uncertainties, which could cause actual results, performance or achievements to differ materially from those anticipated or suggested by such statements.For further discussion of these risks and uncertainties, please see The Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect occurrence of unanticipated events.
Now I'd like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?
02:00 Thank you, Andres. Good morning, everyone. The Bancorp earned twenty eight point three million dollars in net income or zero point four eight dollars per share from four percent year-over-year revenue growth with six percent expense decrease. Interest income increased two percent, while net interest income increased nine percent year-over-year.
02:18 Loan balances grew twenty six percent year-over-year and eight percent quarter-over-quarter. Balance growth year-over-year was led by institutional banking, which includes SBLOC, IBLOC and RIA financing with a thirty two percent increase in balances. All businesses continue to grow quarter-over-quarter with institutional growing six percent, SBA three percent and leasing two percent.
02:39 Gross dollar volume from our cards business grew two percent year-over-year, while payments related fee income decreased slightly. Both GDV and fee income were impacted by the loss of volume this quarter also had a year over year impact of twenty twenty stimulus that contributed to slower growth.
Our relaunch commercial real estate business exceeded our expectations that is already close to approximately two hundred million dollars of our new floating rate loans with at least another three hundred million dollars set to close in the fourth quarter.
03:07 Our current estimate is approximately five fifty million dollars for the full year, twenty twenty one and new CRE loans. These loans like our previous securitization business credits, which were mark to market are reserved against and will not be securitized, but maybe sold to institutions.
03:23 Our current target is approximately three hundred percent of capital for CRE floating rate exposure in aggregate. Due to changes in FDIC guidance regarding the definition of broker deposits, FBIC insurance costs have been meaningfully reduced from sixteen basis points to ten basis points. This may reduce total expense by approximately four million dollars a year or one million dollar a quarter. The majority of our deposits are no longer classified as brokered and our insurance costs for the quarter were very close to the minimum cost of nine basis points per one dollar of deposits.
03:54 We also announced the departure of our Chairman, Daniel Cohen who has been a member of the TBB community since its founding. The Board would like to thank Daniel for all his contributions and wish him great success on his many ventures. I would additionally like to thank Daniel personally for his significant support during our company's transformation into a leader in the fintech industry and across our thriving specialty lending businesses. The Board has selected board member, Jay McEntee III to succeed Daniel as Chairman effective November one.
04:23 In addition, [indiscernible] has been appointed as a new director and John Crystal has notified the Board of his plans to resign effective February 28, twenty twenty two. Lastly, based on our year to date performance of one point four two dollars a share and our twenty twenty one outlook we now believe that exceeding our twenty twenty one guidance of one point seven eight dollars is likely. However, we are not issuing new guidance, but note, that the bias is toward over performance. We continue to see tailwinds -- tailwinds that should drive continued growth in twenty twenty -- twenty twenty one earnings and beyond.
04:58 We are all so issuing preliminary guidance for twenty twenty two of two point one five a share. This twenty twenty two guidance does not include stock buybacks. This is approximately twenty one percent income growth over twenty twenty one.
05:12 I now turn our call over to CFO Paul Frenkiel to give more details about the second quarter. Paul?
05:19 Thank you, Damian. Return our assets and equity for the third quarter were respectively one point eight percent and eighteen percent compared to one point five percent and seventeen percent in Q3 twenty twenty. The increased returns reflected a two point two million dollars increase in non-interest income, a two point six million dollars decrease in non-interest expense and a lower tax rate.
05:44 A nine hundred thousand dollars increase in net interest income reflected loan growth, but was significantly offset by the one point nine million dollars impact of prepayments on commercial real estate loans. However, net realized and unrealized gains on commercial loans increased three point six million dollars, which resulted primarily from fees related to those prepayments. In the third quarter of twenty twenty one, we recommenced the origination of such loans which are intended to offset the impact of such prepayments and payoffs.
06:20 Interest income reflected a reduction of one million dollars in security interest reflecting lower securities balances, prepayments of higher yielding securities and lower reinvestment rates. Our average loans for the quarter of four point six billion dollars grew nine percent over Q3 twenty twenty. We believe our loan portfolios generally are lower risk than other forms of lending as a result of their charge off history, which reflects the nature of related collateral.
06:48 Our non-SBA one point five billion dollars of commercial real estate loans at fair value are comprised primarily of apartment buildings, while at SBLOC and IBLOC portfolios are respectively collateralized by marketable securities or the cash value of life insurance. Our small business loan portfolios comprised primarily of SBA loans, which are either seventy five percent government guaranteed or have fifty percent to sixty percent origination date loan to values.
07:17 For our leasing portfolio, we have recourses the underlying vehicles and a prolonged history pricing leases to minimize losses. Tables contained in the press – in the earnings press release details the diversification of our loan portfolios. Substantially, all loans with COVID payment deferrals have recommended payments and only one point three million dollars of non U.S. government guaranteed principal remained in deferral at September thirty.
07:46 Interest expense was comparable to Q3 twenty twenty, while the Q3 twenty twenty one cost of funds was eighteen basis points. Most of our deposit interest expense is contractually tied to a percentage of changes in market interest rates.
08:03 The Net interest margin was three point three five percent compared to three point three seven percent in Q3 twenty twenty, while yields on loans were lower at four point zero five percent compared to four point two two percent, they comprised a greater proportion of interest earning assets in twenty twenty one, which contributed positively to the twenty twenty one margin.
08:26 The Q2 twenty twenty three NIM of three point one nine percent reflected the impact of twenty twenty one stimulus payments, which temporarily increase balances at the Federal Reserve earning nominal rates.
08:41 As recipients spent their stimulus, average interest earning assets were reduced from six point eight billion dollars last quarter to six point one billion dollars this quarter. The provision for credit losses increased to one point six million dollars, which reflect -- which reflected the impact of the charge off of the non-guaranteed portion of an SBA loan on the CECL methodology as well as loan growth. Because SBLOC and IBLOC loans are respectively collateralized by marketable securities and the cash value of life insurance have incurred only nominal credit losses, management excludes those loans from the ratio of the allowance to total loans and its internal analysis. The Adjusted ratio was approximately one point two percent.
09:27 Prepaid debit and other payment related accounts are our largest funding source and the primary driver of non-interest income. Total fees and related payments income decreased five percent to twenty point one million dollars in Q3 twenty twenty one compared to the prior year, reflecting the exit of the single relationship that Damian mentioned previously.
09:52 Non interest expense for Q3 twenty twenty one was thirty nine point four million dollars reflecting a decrease of two point six million dollars or six percent from the prior year. The decrease reflected a one point nine million dollars decrease in FDIC insurance, which reflected the lower insurance rate noted earlier in the call. While the future impact may be one million dollars per quarter, the current quarter impact was higher due to the cumulative effect of the change.
10:25 Multiple factors are considered in the FDIC insurance assessments, which also may be modified by the FDIC in the future. We continue to focus on expense management, especially in relation to revenue growth.
10:39 quarter results also reflected the impact of an approximate twenty three percent tax rate versus higher tax rates in recent years. The reduction resulted from excess tax deductions related to stock based compensation. The large reduction and tax benefit resulted from the increase in the company's stock price as compared to the original grant date of the stock compensation. Book value per share increased fifteen percent to eleven point one three dollars compared to nine point seven one dollars a year earlier, reflecting earnings per share and the impact of stock repurchases.
11:16 I will now call -- I will now turn the call back to Damian.
11:21 Thank you very much, Paul. Operator, could you please open the line for questions?
11:26 [Operator Instructions] Your first question comes from the line of Frank Schiraldi with Piper Sandler.
11:41 Good morning.
11:41 Good morning, Frank. Good morning.
11:44 Just on the two point one five dollars next year, the guidance, just wondered if you could share any drivers of that twenty percent EPS growth, such as expectations on GDP or any ramp up in those loan -- gain on sale loans. Just curious, if you can drill down into any color there.
12:11 So the GDV is going to -- they return to trend. So we had the stimulus made it very difficult to predict, because of the lumpiness plus we had the loss of the one program that we mentioned, which did impact the GDV growth in this quarter. So if you back those two out in total, you would have a double-digit GDV growth. So that's how big the impact was, that's our best estimate.
12:42 So that's going to return the trend, you should see better growth in the fourth quarter and you should see a much better growth in twenty twenty two. We know what our pipeline is, we've added some major programs. So GDV growth should return more to the trend level.
13:00 In addition, we have a lot of initiatives going on in the credit area that's linked to payments and so you'll probably see increased realization of fee growth in addition to that. So you know how we've had a lower realization, due to the tears and our pricing to large programs, they've pretty much maxed out now and so you're getting new programs and then you're going to get fees through the credit area. So that should be very strong for twenty twenty two, and then really build into twenty twenty three. So we're very confident that's going to support the earnings per share.
13:38 Credit is -- our programs across the board will continue to grow double-digit. we've been in the mid for SBA. Leasing has a little bit of a headwind, based on the availability of cars, but luckily we have a very good presence in the marketplace and be able to secure vehicles. As that works out you'll see increased growth in leasing also. So you'll be in that mid -- maybe even above trend for a little while as cars become available.
14:10 And then the big question is the whole CRE program where we're realizing fees in the near-term on the securitization portfolio, while replacing it with slightly lower spread loans that are these floating rate multi-use, excuse me, multi-family properties and so that timing of that through twenty twenty two is a real question. I think we'll be able to generate the income necessary, because there is that to offset for fees as their payback. But additionally, we're -- the new portfolio of CRE has been very, very successful in the marketplace. So as I mentioned, we're already at about five point five zero dollars we think at the end of the year and so we'll be able to build out of that very quickly.
14:58 In addition, if we need to we can over originate the loans and distribute those naturally securitization, but through loan sales and realize those fees immediately. So across the board, we see strength in certain areas, we are seeing pipelines that we've never seen before, especially in our institutional business, but also obviously in CRE and SBA. So we're very comfortable with the two point one five dollars a share.
15:27 The one thing I will note very long-winded answer is that there's probably a little bit more variability, we could really over produced on the two point one five dollars, but that would have to dovetail with the payoffs of the loans and where we start the year based on how many loans payoff in the fourth quarter. So we're watching that very closely and adjust, but we think two point one five dollars a share is a good estimate right now.
15:55 Okay. Thanks for all the color. And then in terms of GDV going back to run rate. In the past, I guess, a good rule of thumb as you have these volume discounts is that, card fees will grow maybe half of GDV growth. Is that kind of leveling out now that you're adding these new programs and could we see more sort of similar to GDV growth in terms of card fee growth going forward?
16:22 Yes, I don't know, and it's also a mix during this time of volatility, where some of the cards weren't really use like commuter cards and there is a lot that goes into the calculation, but it's two sources: one, is new programs and the second is credit initiatives that are linked to our major programs where we started developing with our major partners our ability to use our balance sheet in a very low risk way. So that doesn't -- those aren't GDV dependent initiatives, so from those two areas, new programs and fees from the sponsorship of credit instead of payments, bank sponsorship should drive that proportion higher over the next eighteen months. Not sure exactly when and where, but definitely as we work through the year twenty twenty two, we should see higher realization rate.
17:14 And then when you say credit sponsorship, are you're talking mostly originate and sell? Or could you hold some of this on balance sheet?
17:14 No, it's a combination of those things in their early -- we're not going to securitize. So it will be utilizing our balance sheet with major partners by providing in many cases the loans may actually be booked on our -- will be the true lender. So these are very advantageous to us. We've got a lot of liquidity, and I think they will add a lot to the fee base that we're generating in that area.
17:53 Okay. And then you mentioned the two point one five dollars doesn't include stock buybacks. You guys have been pretty religious about completing your quarterly authorization here in twenty twenty one given where the stock is now? Do you see the same sort of a game plan for twenty twenty two?
18:13 Yes. So this is all based on rigorous understanding of PE market to book multiples, when you hit the exemplary range, which we are on ROE we're at eighteen percent and we're going to above twenty percent, you get about five percent of banks really do create fantastic shareholder return. So we think we should be at, you know, we're right now, we're about eighteen percent trailing, PE we think we should at the end of the day be at twenty percent in a forward look, that's where we think our stock price should be. So if we're at twenty times whatever our guidance is, if our stock's not there we'll be buying back.
18:55 Got it. Okay, great. And then just one last one, just people are starting to obviously you guys have given guide for twenty twenty two, but people are even starting to look beyond that. And if you think longer term, you have that goal out there greater than, I think five hundred million in revenues by twenty twenty five. So that would assume double-digit revenue growth over a multi-year period? And then the question is, the scale story continue through that point in your estimation, so that revenue growth will or could -- should continue to outpace expense growth and therefore you could see this twenty percent EPS growth could be reasonable to extrapolate forward?
19:39 Well, we haven't given guidance, but in our investor presentation where we issued, we've been very rigorous about those three tenants of our strategy. One is the, you know, the whole payments the Fintech Solutions Group, where we're trying to really look forward and turn ourselves not into a bank with a technology company, but a technology company with the bank. And so there is a pull envelope of middle office activities that we're investing in not only for our partners, but hopefully to monetize out in the marketplace as we approach the end of that four year period. So we're very optimistic of where we are right now.
20:27 We had this bumpy ride on GDV with stimulus, we also -- you are in a extremely low interest rate environment and we've been able to adapt to it. So in a more normalized environment and having just those supporting tailwinds, the virtualization of banking, all those things plus our focus on not the use of the balance sheet, but the use of our capabilities to produce fee income should really have long-term impact on our ability to generate above market returns and also return significant amounts of capital to shareholders.
21:06 Okay, all right. I appreciate all the color. I'll let someone else hop up on. Thank you.
21:10 You're welcome. Thanks, Frank.
21:20 [Operator Instructions] Your next question comes from the line of William Wallace with Raymond James.
21:26 Hi, good morning, Damian. How are you?
21:28 Hey, Wally, good. Hope everything is well.
21:31 It is. Thank you. So wanted to just dig into some balance sheet questions here. Why take on the three hundred million dollars of short-term borrowings in the quarter?
21:45 I can respond to that. It was periodically to manage our Federal reserve requirements and test our liquidity. We test that, that line from between, like a one hundred million dollars to three hundred million dollars and we averaged -- on average we were a lot lower it was a small fraction of that three hundred million dollars, it it just happened on the last day that we had done that we weren't really planning to keep that three hundred million dollars. So on a daily basis you might see a fraction of that three hundred million dollars that we -- that I said -- as I said, we used to managed reserve requirements.
22:34 Okay. Okay, so it should mostly -- we would anticipate mostly, I'd say, be gone by the end of the year?
22:45 We have a lot of flexibility, we are one of the few banks that over time -- that over time has actually exited deposit relationships. So we have a lot of flexibly, so we can actually determine the size of our balance sheet, the size of our deposits. So that's really going to be what we determine it should be. And as I said before, there may be some borrowings, it's really just to manage our daily cash. We do have being a payments company and having a lot of inflows and outflows that have different timing elements to them, you might see deposits and therefore cash fluctuate on a daily basis. So the lines are helpful in managing cash on a daily basis.
23:37 Okay, okay. And can help, but notice that you are down you had -- you are deposits are down another five hundred and fifty million dollars plus this quarter, they're down about one point eight billion dollars from the first quarter. Does that have anything to do with this one program that you lost fraction?
24:01 I'll let Paul take it, but a fraction of it does, but that's mostly driven by our own actions to lower the size of the balance sheet and the stimulus. But Paul why don't you take that?
24:13Yes Yes, it is basically those two factors. The biggest single factor was the stimulus that resulted in taking us from like a low six billion dollar bank to a high -- to almost a seven billion dollar bank. As the stimulus got spend throughout the year as I said in my comments in the third quarter things normalized and we're closer to a six billion dollar bank. But yes, the -- obviously that one relationship did have an impact. In addition to that we exited some other deposits. The way we basically determine, which one is to exit are based on cost. So we've been calling actually for years. The higher cost deposits and that's left us with the cost of funds of eighteen bps.
25:11 Yes, we just have a lot of flexibility on deposits, so we had no problem adjusting even through the getting a lot of excess deposits it did obviously hurt some of our ratios, but we managed through it very quickly and rightsize the bank. But -- with our partner base, it's very easy to get additional deposits if we need them. But sometimes you don't want to pay up for them. So we want to have the lowest cost possible and that's why we use the lines and that's why on a long-term basis, we want to make sure that we have the right partners in the right agreements in place, but we're very comfortable with the funding of the bank.
26:00 Okay. And then, I mean, can you quantify how much of the deposits were related to the one program. And then, excuse me, was the one program -- was this a -- is this a customer that, that had higher cost deposits that you were less -- they were less profitable, the relationship [Multiple Speaker]
So the program we mentioned before, it's borrow remember they got a bank license and so they're not the majority of those deposits. There are less than thirty percent of that excess deposit base.
26:40 26:40 Okay, and the nature of these programs is such that they can't just cancel the contracts or wait till the end of the contract. And then walk away and take deposits with them. Is that correct or not?
26:57 So that we always knew the intentions of that program. So that was a multi-year transition plan. We were very aware of what was going to happen, but it's depending on when to -- when something like that happens it depends when they record they have to act. They've basically have to redo everything that we've done, so they want to do that in a more aggressive way and that's fine. And so it did have an impact on tewenty twenty one, but it will be -- that impact will be over, obviously in the beginning of next year. So that's why we're very comfortable with returning to trend growth, with new programs.
27:38 So -- and it wasn't that big of a deposit, but we're not going to say exactly what that was, but it wasn't you can make an estimate by simply getting the call report of which is a publicly available, and you can make that estimate a loan by backing out some proceeds growth that maybe came through their own communications to the marketplace.
28:00 Yes. Okay, thank you, Damian. And then on the GDV side, so if I look at GDV on a year-over-year basis in the third quarter it was GDV growth was about two percent. So if we think about returning to trend for the next three quarters or so I should see theoretically or hopefully some year-over-year growth. But then returning to your prior guide of roughly twenty percent. I believe is what you guys felt like you had visibility to in product cost.
28:37 Yes. Yes, we'll really depend on the virtualization of the -- there's a lot of factors that grow in there, but we -- the best or best estimate, you will see growth for various reasons in the fourth quarter. We're already seeing good growth. We had a really bad November remember with the election. You had -- you didn't have a great quarter last year in the fourth quarter. So you're going to see obviously much higher growth than you did in the third quarter, at least that's our estimate right now. We obviously don't know what's going to happen with consumer spend, there's a lot of ambiguity in the marketplace. But you should see much better growth in the fourth quarter.
29:16 Then you still -- in the first quarter of next year, you still have this other stimulus that came in, in March, so though our balances at the -- our biggest programs in some of the newer programs are really starting to come online that's going to be -- we think we're going to see significant growth. But that's going to be the end of this year-over-year impact from government intervention that will really be the last time that we see a big bulk stimulus payment where you have to kind of guesstimate what your program growth is, because you really don't know how much was stimulus, how much was spent, et cetera, et cetera.
29:57 Okay, all right. And then back to one of Frank's questions talking about the GDV margin, you started talking about other types of programs that are maybe more along the lines of credit sponsorship et cetera., that sounds like, it would be a new line item business, not necessarily GDV margin type. So I think wouldn't go in the pre-payments business. What it -- I mean, maybe help me understand what your –
30:23 It depends on how we at the end of the day might and might not to your point. The reality is, is that it will add to significantly to profitability. So we haven't decided the final structure of that program, and how it's going to be booked, but when we do, we will announce it and it may not appear in that line. That's correct.
30:46 Okay. So is it fair to then maybe classify what we are hearing today suggesting that will return to trend growth on GDV, which I believe you have stated, think about maybe twenty percent-ish type volume growth with about a ten percent type revenue growth, that now perhaps, there could be some tailwinds to that ten percent level, due to some new partnership opportunities and structures?
31:17 Well, yes, but I would -- regardless of how we book the business, if it's a purely credit line or different line item, they should be aggregated, I would suggest they should be aggregated together, because it's really part of the same relationships based off the -- that whole ecosystem. So I think you can look at it anyway you want, but even if we don't look it in that line, you should probably put it together and analyze it that way, because it's very synergistic.
31:50 Yes, okay. Okay, great. And then last question on the FDIC line, you've said the -- that it should -- the new classification in deposits should save about one million dollar a quarter. So that would suggest that the run rate expense is closer to like one point five million dollar -- one million dollar to one point five million dollat, not where you were in the third quarter, correct?
32:15 Yes. So the easiest way to do that in your model is to look at the rates, the rate for us will be approximately ten bps, so just take that ten bps times your average liabilities for the quarter, and that comes out as Damian mentioned to about one million dollar a year. I'm sorry, one million dollar million a quarter.
32:43 Okay, thank you guys very much. Appreciate the time.
32:47 Thanks, Wally
32:50 At this time there are no further questions. I would now like to turn the call back over to Damian Kozlowski for closing remarks.
32:57 Thank you, operator and thank you everyone, it's -- we're making a lot of progress. We're very optimistic on our progress in twenty twenty one, it looks like a lot of tailwinds for twenty twenty two and beyond. And we're going to just keep on working very hard to realize those opportunities in the marketplace. Thank you, everyone. Operator, you can disconnect the call.
33:21 This concludes today's conference. You may now disconnect.